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Subjective Well-Being and Relative Poverty in Rural Bangladesh IZA DP No. 6569 Subjective Well-Being and Relative Poverty in Rural Bangladesh Mohammad Niaz Asadullah Nazmul Chaudhury May 2012 DISCUSSION PAPER SERIES Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor Subjective Well-Being and Relative Poverty in Rural Bangladesh Mohammad Niaz Asadullah University of Reading, ESRC and IZA Nazmul Chaudhury RED, BRAC and World Bank Discussion Paper No. 6569 May 2012 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: [email protected] Any opinions expressed here are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 6569 May 2012 ABSTRACT Subjective Well-Being and Relative Poverty in Rural Bangladesh* This paper revisits the debate over the importance of absolute vs. relative income as a correlate of subjective well-being using data from Bangladesh, one of the poorest countries in the world with high levels of corruption and poor governance. We do so by combining household data with population census and village survey records. Our results show that conditional on own household income, respondents report higher satisfaction levels when they experience an increase in their income over the past years. More importantly, individuals who report their income to be lower than their neighbours in the village also report less satisfaction with life. At the same time, our evidence suggests that relative wealth effect is stronger for the rich. Similarly, in villages with higher inequality, individuals report less satisfaction with life. However, when compared to the effect of absolute income, these effects (i.e. relative income and local inequality) are modest. Amongst other factors, we study the influence of institutional quality. Institutional quality, measured in terms of confidence in police, matters for well-being: it enters with a positive and significant coefficient in the well- being function. JEL Classification: O12, I30, I31 Keywords: poverty, well-being, institutions, Bangladesh Corresponding author: M Niaz Asadullah Department of Economics University of Reading PO Box 218, Whiteknights Reading RG6 6AA United Kingdom E-mail: [email protected] * Niaz Asadullah gratefully acknowledges support from the Leverhulme Trust UK and Research and Evaluation Division (RED) of Bangladesh Rural Advancement Committee (BRAC). We express our appreciation for additional funding and institutional support from the South Asia Human Development, World Bank as well as the Bangladesh Country Management Unit. This study does not necessarily reflect the views of the World Bank or the Governments they represent. Lastly, we would like to thank Zihad Hassan who managed survey work with utmost professional competence. An earlier version of the paper was presented at a seminar in the Institute of Microfinance (InM), Dhaka. We are grateful to seminar participants and Shahid Khandker for helpful comments. 1. Introduction Of late, there has been a spate of economic investigations on the determinants of subjective life-satisfaction. Arguing that life-satisfaction scores provide a measure of true utility1, findings of these studies have been used to highlight both economic and non-economic aspects of individual well-being. Evidence suggests that relative to income, influence of other factors is either of equal or even greater importance. This is a promising line of inquiry in the context of the existing debate on the multidimensionality of poverty. Life-satisfaction research, by way of jointly studying the role of institutions, belief system, income and, economic inequality and so on, provides a convenient way to compare and contrast economic and non-economic factors in determining individual well-being. If well-being cannot be defined in the commodity space, the influence of income vis-à-vis that of non-income variables should be modest. To this end, research using developed country data finds that non- income related factors matter as well. Well-being is lower in countries where inflation is high, institutions are of poor quality (Helliwell, 2003; Helliwell, 2006) and, inequality is high (Alesina, Di Tella and MacCulloch, 20042). Cross-country analysis on the correlates of well-being reveals that even after holding income constant, difference in happiness is explained by unemployment level in the economy (Clark and Oswald, 1994) and level of trust in the society (Helliwell and Putnam, 2004; Helliwell and Huang, 2005; Helliwell and Wang, 2010). Using four rounds of World Values Survey data spanning 75 countries, Helliwell (2003) finds that income effect is dominated by government quality. Another notable aspect of this study is the finding that for different stages of development, different type of government institutions is relevant. Honest governments are more important in low income countries whilst political stability is more relevant for developed 1 There is a wide-acceptance of the use of subjective data today. Although economists have traditionally focused on revealed preferences, analysis of self-reported wellbeing measures reveals that (a) well-being equations are broadly “similar” across countries suggesting that the data does not just contain noise; (b) answers to life satisfaction questions are clearly correlated with a number of observable phenomena that are true indicators of wellbeing such as the risk of coronary heart disease, hypertension, stress, depression, anxiety, pain, blood-pressure measures (Oswald, 1997; Blanchflower and Oswald, 2008); (c) suicide rate (which is based on behaviour rather than subjective opinions and arguably a true measure of utility) also predicts life-satisfaction (Helliwell, 2004). This suggests that even if happiness scores measure true internal utility with some noise, the signal-to-noise ratio is sufficiently high to make empirical research productive (Di Tella and MacCulloch, 2006). 2 Alesina et al. find that wage inequality depresses reported happiness in a region in both US and Europe. 2 countries. Second, the effect of institutional quality is found to dominate that of GDP. Lastly, well-being gains from better institutions are larger amongst the poor (because they suffer most from corruption). In parallel to the cross-country studies, there exists a large body of literature which employs country-specific micro datasets. This research finds sizable reference group effects. For the US, it is found that relative income not only affects well-being positively, change in welfare owing to increase in mean income in residential locality is equal to fall in personal income using US data (Luttmer, 2004). Similarly, Helliwell and Huang (2009) find that family/personal income and mean income in census tract equally affect in Canada3. Similarly, using Danish data Clark, Kristensen and Westergård-Nielsen (2009) find that conditional on own household income, respondents report higher satisfaction levels when their neighbours are richer. The finding that relative instead of absolute income has a stronger effect as a correlate of well-being has important policy implication: if the poor cares about their relative position in the income distribution, policies that aim to raise their welfare has to additionally address the issue of economic inequality. This paper builds on the existing developed country studies and contributes to the small but growing developing country literature on subjective well-being using a new household survey dataset from rural Bangladesh that spans 96 villages. In particular, we follow Halliwell (2003) and combine individual and aggregate (i.e. community) level variables to explain well-being. Respondents in our survey were asked, among other things, the following question (which they answered on a scale of 1-10): “On the whole, how satisfied are you with your life?” We use this subjective assessment of life-satisfaction or happiness4 as a proxy measure of “utility”5 and estimate well-being 3 Similar reference group effect is also reported for other correlate of welfare: Clark (2003) finds that an unemployed person’s wellbeing is positively correlated with regional/household unemployment. 4 We treat the terms “life satisfaction” and happiness interchangeably. 5 The measurement of subjective well-being confounds interpersonal comparisons of welfare using subjective data (Kahneman and Krueger, 2006). For instance, a methodological problem is that life satisfaction score assumes cardinality whilst satisfaction scores are not necessarily
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